Finally, relevant analysis of what caused the Depression of 2010. And since the cause was exclusively related to the economics of the land market, which brought the last business cycle to an end, this inevitably leads to the question: Will the next cycle also be driven by a land-led boom/bust?
The onset of the new realism began when Martin Wolf analysed my book 2010: The Inquest in the Financial Times (July 8). He summarised the mechanism that drives the economy to distraction in these terms:
“Buyers rent property from bankers, in return for a gamble on the upside. A host of agents gain fees from arranging, packaging and distributing the fruits of such highly speculative transactions. In the long upswing (the most recent one lasted 11 years in the UK), they all become rich together, as credit and debt explode upwards. Then, when the collapse comes, recent borrowers, the financial institutions and taxpayers suffer huge losses. This is no more than a giant pyramid selling scheme and one whose dire consequences we have seen again and again. It is ultimately, as Mr Harrison argues, a ruinous way of running our affairs.”
That message has to sink into the heads of economists if they want to guide the western economy out of the depression. But there is a long way to go, as evidenced by the confusion in Britain’s Office for National Statistics (ONS). It reports that the UK only escaped the relapse into recession by the scale of government money pump-priming. But the figures were not disclosed for two weeks, without explanation for the delay. Something is awry in the numbers game, and the ONS won’t allay suspicions by explaining what was odd about its data.
A Dose of Chinese Medicine
A dose of reality from Beijing. Its credit rating agency, the Dagong Global Credit Rating Co., has challenged the capitalist paradigm by downgrading the rating of the US, UK, Germany and France They lost their AAA rating. Reason: Dagong accuses its western competitors of ideological bias. But that bias was not designed to favour the West against the East. The bias flows from the theory of capitalism which favours rent-seeking activities.
Dagong calculates its ratings by giving greater weight to “wealth-creating capacity”. This exposes the weakness at the heart of the capitalist economy, which is structured to shove entrepreneurship aside in favour of speculation which generate the maximum gains out of land. That is the Achilles heel of capitalism.
But China is not immune to this pathology. Since April, Beijing has had to rein in its overheated economy. Property speculation had got out of hand. Last month, real estate prices eased for the first time in 18 months as the stranglehold on the value-adding economy began to curb the speculators.
Austerity in the West, Big Time
While the Chinese fine-tune, Western governments are using Red Adair-type fire-fighting methods – dropping TNT down their economic holes to try and blow back the debt conflagration. Policy-makers are being berated for not maintaining spending levels to cushion the downturn, by commentators like The Guardian’s Polly Toynbee.
Writing on July 13, she accused the UK’s coalition government of “social cleansing” because it plans to cut housing benefits for low-income families. Instead, she says, the discredited Labour party ought to have adopted the policy highlighted by Martin Wolf – the taxation of future growth in land values.
Says Toynbee: “That is what Labour should have done and should commit to in the future”. So where was she when the Blair/Brown coalition was in power, when Labour could have forestalled the Depression of 2010?
Towards the Crash of ’25
According to PricewaterhouseCoopers’ Economic Outlook, property prices in Britain will not recover for another decade. Broadly speaking, that’s also the likely outcome for large swathes of the property market throughout the West. But where was PWC when we needed them in the run-up to the credit crunch of 2008?
Unless the Wolf realism infects mainstream analysts, expect the disarray to continue and for the next property cycle to terminate in 2025. Wolf has just been appointed as one of 5 experts to the new Financial Policy Committee within the Bank of England, which will operate “in parallel with its existing Monetary Policy Committee”.
Will Wolf be able to influence the Bank of England? Not likely. So a lot of traps await the unwary between now and the Crash of ’25.